Despite posting its best result for five years, the market is not slacking off in its pursuit of underwriting profit

Lloyd’s has announced its highest first-half profit and lowest combined ratio for five years at £1.5bn and 88.7%, respectively.

But how excited should we be by this? Most global (re)insurers with exposure to international business have had a far better time in the first half of this year than they did in the same period last year because of the far lighter claims burden.

While the first half of 2012 has not been loss-free, the same period last year contained some of the worst losses the industry has seen, in particular the Tohoku earthquake in Japan.

So Lloyd’s could be expected to have a better year than last year. However, what is encouraging is the market’s performance over five years - a better measure than comparing just two years for catastrophe-exposed entities.

Its average first-half combined ratio across 2008 to 2012 is 96.3%, which is firmly in profitable territory. Its average annualised first-half return on capital over the same period of 9.5% would not set investors’ pulses racing, especially given that most companies target a 15% return on capital, in the current low interest rate environment, and judging by the performance of its peers, this is by no means a bad result.

More encouraging still is that Lloyd’s is not using a good first half to slacken off in its pursuit of underwriting profit. It acknowledges that its good performance in the first half of 2012 is mostly down to a relatively low level of claims. Lloyd’s chairman John Nelson said in a statement accompanying the results this morning: “We cannot count on an extended period of low claims activity lasting until the end of 2012. This is particularly the case while interest rates remain at historically low levels, meaning we cannot rely on investment income to make up for underwriting deficits.”

One possible source for concern could be the fact that gross written premiums at Lloyd’s are up 9% at a time when, as Nelson stated: “Rates on many classes remain marginal despite the exceptional level of claims in 2011.”

It could be assumed that Lloyd’s was growing in a softening market. However, Lloyd’s chief executive Richard Ward deftly dealt with this concern, explaining that a significant portion of the rise has been driven by movements in foreign exchange rates, hardening prices in some lines of business and inflationary increases in insured values.

While a good profit in a quiet year might be expected from global (re)insurers, for Lloyd’s it shows that it has firmly put the bad old days behind it.